West Asia conflict fuels defence stocks. Now comes the harder test

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

The rally in defence stocks has shown little sign of losing steam. Having outperformed every year since the pandemic, the sector has extended its winning streak into 2026, with the Nifty Defence index up nearly 20% year to date against an 8% decline in the Nifty 50.

Renewed conflict in West Asia has added fresh fuel to the rally, reviving optimism around defence stocks and India's push for self-reliance. The question now is what drives the next leg: more orders or better execution?

“Since the beginning of 2026, the Nifty India Defence Index has witnessed an upward re-rating of 9.2% (with the index P/E expanding from 51.8x to 56.5x), while the broader Nifty 50 Index has undergone a de-rating (-8.8% with Nifty 50 index P/E contracting from 22.8x to 20.8x),” pointed out Ashwini Shami, smallcase manager, president and chief portfolio manager, OmniScience Capital.

“Heightened geopolitical tensions globally have reinforced the urgency for India to be self-reliant in defence from raw components for ammunition and drones to full-scale platform manufacturing,” said Viraj Gandhi, chief executive officer, SAMCO Mutual Fund.

That urgency has translated into a strong procurement pipeline.

According to a Kotak Institutional Equities report, between FY24 and FY26, the Defence Acquisition Council approved procurements worth nearly ₹16.6 trillion, largely under the Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured) and Buy & Make (Indian) categories.

The approvals reflect the government's push to accelerate indigenization and strengthen defence capabilities across the land, air and naval forces.

“Indian defence companies are well-positioned to benefit from rising geopolitical tensions, accelerating modernization programmes and an expanding export opportunity ( ₹384 bn in FY2026, targeting ₹500 bn by FY2029),” the brokerage said in an 8 July note.

Over the medium term, Kotak expects companies with large order books, proven execution and diversified product portfolios to emerge as winners. It has initiated coverage on Hindustan Aeronautics Ltd with an 'Add' rating, while assigning 'Sell' ratings to Mazagon Dock Shipbuilders and Solar Industries India. It has retained its 'Reduce' rating on Bharat Electronics and 'Sell' rating on Cochin Shipyard.

Large order books have long been a key talking point for defence investors. But as valuations have moved higher, the debate is shifting to what matters more for the next leg of the rally: fresh order wins or the ability to execute existing orders and convert them into earnings.

So while the order-book visibility is real, valuations have run ahead of near-term earnings, meaning sentiment and future expectations are doing more of the heavy lifting than trailing fundamentals at this point, Gandhi said.

Shami believes the key focus should remain on execution capabilities.

“For defence PSUs, the order book-to-revenue ratio continues to range between 2x and 10x, providing reasonable visibility of further order book growth,” he said.

For private-sector defence companies, however, order books are typically less than 2 times current revenue. While execution has remained strong, these companies need to continue securing new orders to support their premium valuation multiples, Shami added.

“Both matter, but right now new order wins carry more weight for investor conviction because markets are, to a large extent, sentiment-driven,” said Gandhi.

Fresh orders provide visibility into future revenue and signal that fundamentals will eventually catch up with the stock price, he feels. That said, this can't be viewed in isolation, he pointed out, as execution track record, margin consistency and delivery timelines are equally important in validating whether that visibility converts into actual earnings.

The debate comes as investors may need to dial back their return expectations for defence stocks. Curr...